The (Tab)ulation

Lawmakers struggling with the Fiscal 2014 budget will face an even tougher challenge funding the government in future years as interest payments rise to record levels, squeezing other parts of the budget and making it more difficult to quell rising deficits.

Although slow economic growth and Federal Reserve monetary policies have kept interest rates at record lows in recent years, the Congressional Budget Office (CBO) expects rates to rise steadily in the coming years, making interest payments the fastest growing part of the federal budget.

For Fiscal 2013, CBO estimates interest payments totaling $223 billion, or 1.3 percent of GDP. By 2023, interest payments are expected to climb to $823 billion, which is 3.1 percent of GDP -- a percentage that has only been exceeded once in the past 50 years. By 2038 the figure would increase to 4.9 percent.

Rising interest payments would make a larger share of revenue unavailable for spending on federal programs; to prevent the deficit from growing larger, rising interest payments would either crowd out spending on federal programs or cause taxes to go up.

Assuming Washington eventually navigates its immediate budget and debt limit difficulties, interest rates are expected to rise in the next few years due to an improving economy. Yet, if interest rates are even...

Syria is not the only challenge Congress faces as it returns to Washington from its August recess. Monday was the first of only nine legislative days that both the Senate and House of Representatives will be in session before the fiscal year ends on Sept. 30. Congress will need to approve a spending plan before then and take action on the debt limit not long after that.

Unfortunately, little progress has been made towards passing a budget this year. The budget resolutions adopted by Senate Democrats and House Republicans are $91 billion apart in overall spending levels, and no appropriations bills have been signed into law.

House Republicans have only been able to muster support for their deep proposed spending reductions in five of twelve appropriation bills, while the only appropriations bill brought to the Senate floor was defeated by a filibuster.

With so little time left on the legislative calendar, Congress is extremely unlikely to finish its appropriations bills on time. That would leave lawmakers with an important choice: adopt a continuing resolution to temporarily fund the government or allow it to shut down.

If that wasn’t bad enough, the government could default within weeks unless Congress raises the debt ceiling. The Treasury warns that it will run out of "...

This year will mark the end of a four-year string of trillion-dollar-plus federal deficits that have troubled the American public and caused turmoil on Capitol Hill.

Fiscal Year 2013 is drawing to a close with a projected deficit of a little over $640 billion, down from $1.1 trillion last year. That’s good news, but it should hardly be considered an “all clear” signal on the nation’s fiscal and economic challenges.

Here are eight reasons why:

1. While the deficit is going down, the federal debt is still going up.

The government is still borrowing a substantial amount of money this year, and that is all being added to the accumulated debt, which is approaching $17 trillion. That’s why elected officials -- despite their usual lamentations and finger-pointing -- have no choice but to raise the debt limit at some point in the next few months. The real question is what they will do to prevent the debt from growing in the future to unsustainable levels.

2. This year’s lower deficit can be largely attributed to short-term economic factors rather than systemic reforms in the federal budget.

During difficult economic times with high unemployment, federal deficits rise as...

Developments on the budget front last week demonstrated both the difficulty of achieving a grand bargain and why it may not be totally out of reach.

First, the difficulty.

It became apparent last week that the House and Senate have made no progress on resolving their differences over Fiscal Year 2014 appropriations. At issue is whether to assume that the sequestration cuts that took effect in March will continue. They are about $90 billion apart and unable to budge.

Then, in a speech last Tuesday, President Obama floated a new kind of “grand bargain”: one aimed at short-term job creation rather than long-term fiscal sustainability. The speech broke no new ground and did little to break the budgetary logjam.

While conceding that a fiscal sustainability plan must eventually be adopted, including a way to replace the sequestration cuts, Obama argued that his plan would at least address the current slow pace of job creation.

Essentially, he proposed to pay for a package of jobs programs (such as he proposed in his budget) with “transition revenue” from base-broadening corporate tax reform ideas that he proposed last year. The only new...

For those who follow the credit rating agencies’ assessments of the United States, the past several weeks have offered mixed messages. Overall, some improvement has been noted, mostly due to the steadily improving economy and the declining deficit. Concerns remain, however, about the long-term outlook and the ability of elected leaders to raise the nation’s debt ceiling without provoking a crisis.

When Moody's Investors Services upgraded the U.S.'s credit-rating outlook from "negative" to "stable" last week, it warned that without further action in Congress, the rating could be under pressure again in the future.

Moody's observed that, "over the longer term, a rise in the fiscal deficit associate[d] with pressure on government spending from health care and Social Security could also pressure the rating if not addressed."

Nevertheless, Moody’s provided the most upbeat assessment for the U.S. of the three main agencies, which also include Fitch Ratings and Standard and Poor’s. Aside from the switch to a stable outlook, Moody’s maintained its AAA rating for the U.S..

The Obama Administration released its Mid-Session Review (MSR) of the budget on Monday. It would be nice to say that this update arrived just in time to clinch the deal on a fiscal sustainability plan, or even a plan to get through the rest of the year, but sadly that is not the case.

There are no apparent negotiations going on between the House and Senate to work out their differences over next year's spending levels, let alone any broader deal involving the President. Certain mechanical functions are grinding forward, such as the release of the MSR and approval of a few appropriations bills, but these are disjointed efforts with no attempt at coordination.

We no longer have "regular order" so much as we have regular chaos. A tacit decision seems to have been made to take no action on the budget until a crisis is at hand, which is not likely to occur until the end of the fiscal year on Sept. 30. And even then, the "fix" might be to simply push things forward just enough to reach the next crisis point – raising the debt ceiling - later in the fall.

Within that context, the MSR means little. Still, it is useful to have the administration reiterate its most recent proposals with updated numbers.

Historically low interest rates, held down by the Federal Reserve’s quantitative easing program, have recently begun to rise sharply. Over the past few weeks, the interest rates on the federal debt rose 67 basis points from 1.66 percent to 2.33 percent. The increase is on pace with what the Congressional Budget Office projected in its most recent budget outlook; CBO estimates there will be $223 billion in net interest payments this year. In that same outlook, the CBO’s baseline assumes an increase in interest rates due to a recovering economy, and projected that interest payments on the federal debt would be $823 billion, or 3.2 percent of GDP in 2023, a percentage that has been exceeded only once in the past 50 years. With rates approaching levels consistent with a growing economy, interest costs will be the fastest growing spending program in the federal budget.

Why Were Rates So Low and Why Are They Rising Now?

During and after the recession, the Federal Reserve bought mortgage-backed bonds and Treasury securities to make borrowing cheaper for consumers and the government...

Judging by recent media reports, there is a growing belief in Washington that the best way to deal with the deficit is to “declare victory.”

It won’t work.

The deficit problem is far from being solved and its lengthy shadow will hang over every other issue, including the economy, until a fiscal sustainability plan is in place.

To be sure, the deficit is coming down and that is good news. However, most of the improvement comes from a recovering economy, allowing expiring tax cuts to expire and assuming that improbable cuts in discretionary spending and Medicare provider payments will actually occur.

And even if all these things turn out as planned, the budget is still on an unsustainable track. We’ll need a lot more than a short-term declining deficit to declare victory. We’ll need a plan that doesn’t just bring the deficit down but keeps it down on a sustainable basis.

The core problem is not a cyclical deficit driven by the ups and downs of the economy but an underlying structural deficit caused by a mismatch between future spending promises and current tax law.

The Congressional Budget Office (CBO) estimates that under current law the deficit will bottom out at $378 billion in 2015 before turning higher again, reaching $895 billion by 2023. Meanwhile, as a share of the...

For those inclined to look beyond the sharp drop in the deficit this year, as we should, the budget update released by the Congressional Budget Office (CBO) on May 14 has some striking indications of things to come.

Not surprisingly, these indications tell us that the most powerful factors in the current budget dynamic are aging, health care costs and interest on the debt -- things political leaders seem the least interested in doing anything about.

One way to show the looming problem is to compare the composition of federal spending in 2013 with 2023 under the CBO current-law baseline. During those 10 years, total spending is projected to rise from 21.5 percent of the economy (GDP) to 22.6 percent. However, it is far from a uniform acceleration.

Discretionary spending, which includes defense, is projected to shrink from 7.6 percent of GDP to 5.5 percent, the lowest level on record.

Mandatory spending other than Social Security and the major health care programs is also projected to shrink, from 2.6 percent of GDP to 2.1percent. Between these declining categories, the total drop in spending totals a very substantial 2.5 percent of...